With many of the advanced economies of the west struggling in the years since the financial crisis of 2007-09, China has acted as the growth engine of the global economy, accounting for more than half the increase in world GDP in recent years.
But the IMF expressed concern at the methods used to keep the economy expanding rapidly
China’s massive debt is on a “dangerous” path, raising the risk of a sharp slowdown in growth, the The International Monetary Fund (IMF), warned on 15th August , urging Beijing to speed up structural reforms.
“International experience suggests that China’s credit growth is on a dangerous trajectory, with increasing risks of a disruptive adjustment and/or a marked growth slowdown,” IMF experts wrote.
While the country’s near-term growth outlook firmed up, it is at the cost of “further large and continuous increases in private and public debt, and thus increasing downside risks in the medium term,” the report said.
The IMF maintained its forecast of 6.7 per cent growth for this year, but the report warned that the country’s debt load could soar from around 235pc of gross domestic product last year to more than 290pc in 2022.
Debt-fuelled investment in infrastructure and real estate has underpinned China’s growth for years but Beijing has launched a crackdown over fears of a potential financial crisis.
If credit was growing at a sustainable rate, GDP would have increased by an average of 5.3pc per year from 2012 to 2016, the IMF estimates, rather than the 7.3pc that it achieved.
“International experience suggests that China’s current credit trajectory is dangerous with increasing risks of a disruptive adjustment and/or a marked growth slowdown,” the report said.
Its analysts studied 43 large credit booms and found that almost every single one resulted in a sharp slowdown or a financial crisis.
The extra debt in recent years has also been used poorly, the IMF believes, as the credit extended to industrial sectors, state-owned enterprises and in certain regions has not been matched by a rise in the value added by those borrowers, “suggesting that they are using credit relatively inefficiently”.
In 2015-16, the IMF estimates, it took 20 trillion renminbi of new credit to raise nominal GDP by just 5 trillion renminbi.
Chinese banks extended 825.5 billion yuan (about $123.44 billion) in new loans in July, down from 1.54 trillion yuan in June. Outstanding total social financing — a broad measure of credit and liquidity — came in at 1.22 trillion yuan last month versus 1.78 trillion yuan in June.
The IMF pointed to the American savings and loan crisis of the 1980s, Japan’s 1997 banking crisis and the US and UK experience in the global financial crisis as examples of crashes that took place despite countries entering them in apparently strong positions.
Aside from dealing with debt, the IMF also said China needs to address overcapacity and increase productivity in inefficient sectors, including those featuring China's "zombie" state-owned enterprises.